Gold Exchange Traded Funds

Features of Investment in Gold ETF

4/12/2008
www.equitybulls.com
AARUDHRA FINANCIAL SERVICES
Gold Exchange Traded Funds

Gold Exchange Traded Fund

Exchange Traded Funds (ETFs) are open ended mutual funds that are passively managed and
most of them seek to mirror the return of an index, a commodity or a basket of assets. ETFs are
listed and traded on stock exchanges like stocks. They enable investors to gain broad exposure to
indices or defined underlying asset (commodity) with relative case, on a real-time basis, and at a
lower cost than many other forms of investing.

Gold ETFs provided investors a means of participating in the gold bullion market without the
necessity of taking physical delivery of gold, and to buy and sell that participation through the
trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold
prices move up, the ETF appreciates and when gold prices move down, the ETF loses value.

Gold ETF tracks the performance of Gold Bullion. Gold ETFs provide returns that, before
expenses, closely correspond to the returns provided by physical Gold. Each unit is
approximately equal to the price of 1 gram of Gold. But, there are Gold ETFs which also provide
a unit which is approximately equal to the price of ½ gram of Gold.

Why should an investor invest in Gold ETF?

• No worry on adulteration
• Gold provides diversification to the portfolio
• Gold is considered as a Global Asset Class
• Gold is used as a Hedge against Inflation
• Gold is considered to be less volatile compared to equities
• Held in Electronic Form
• Store of value
• Extremely Liquid

Advantages of Investing in Gold ETFs:

• Potentially cheaper to have price exposure to gold price as compared to other available
avenues
• Quick and convenient dealing through demat account
• No storage and security issue for investors
• Transparent pricing
• Taxation of Mutual Fund
• Can be traded on stock exchange like buying / selling a stock
• Ideal for retail investor as minimum lot size to trade is one unit on secondary market
• NAV of a unit will track price of approximately ½ or 1 gram of gold

www.equitybulls.com - A report by AARUDHRA FINANCIAL SERVICES Page 2

Gold Exchange Traded Funds

Comparison of Gold ETF with Physical Gold

S No Parameter Jeweller Bank Gold ETF
1 How Gold is held Physical (Bars / Physical (Bars / Dematerialized
Coins) Coins) (Electronic Form)
2 Pricing Differs from one to Differs from bank to Linked to
another. Neither bank. Not Standard. International Gold
transparent nor Prices and very
standard. transparent.
3 Buying Premium Likely to be more Likely to be more Likely to be less
above gold price
4 Making Charges Charges are Charges are incurred No Charges are
incurred incurred
5 Impurity Risk High Nil Nil
6 Storage Locker / Safe Locker / Safe Demat Account
Requirement
7 Security of Asset Investor is Investor is Fund House takes
responsible responsible the responsibility
8 Resale Conditional and Banks do not buy At Secondary
uneconomical back Market Prices
9 Convenience in Less convenient, Less convenient, as More Convenient,
Buying / Selling as Gold needs to Gold needs to be as held in
be moved moved physically electronic form
physically under the demat
account
10 Quantity to Buy / Available in Available in standard Minimum is ½ or
Sell standard denomination 1 gram according
denomination to the fund
11 Bid Ask Spread Very High Can’t Sell Back Very Low
12 Risk of Theft Yes, possible Yes, possible No, Not possible
13 Wealth Tax Yes Yes No
14 Long Term Capital Only after 3 years Only after 3 years After 1 year
Gains Tax

Investor Requirements for trading in Gold ETF

• Trading account with a stock exchange broker
• Demat account as Gold ETF can be traded only in demat form

Settlement: The transactions are settled with T+2 rolling settlement

Load Structure
Entry Load: Nil

Exit Load: Nil

www.equitybulls.com - A report by AARUDHRA FINANCIAL SERVICES Page 3

Gold Exchange Traded Funds

Tax treatment of Gold ETF

The Gold ETF is classified under mutual fund and will be taxed as per non equity mutual fund
taxation rules. Investor investing in Gold ETF need not pay wealth tax. Investor has to pay taxes
after redemption as per the tax laws applicable for non equity mutual fund. But, when the Gold
ETF is redeemed for physical gold the taxation rules will be similar to that of physical gold.

Risks Involved
• Mutual Funds and Securities investments are subject to market risks and there can be no
assurance or guarantee that the objective of the scheme will be achieved.
• As with any investment in securities, the NAV (Net Asset Value) of the units issued under
the ETF can go up or down depending on the factors and forces affecting the Bullion
Market, Capital Market and Money Market.
• The Past Performance of the fund house issuing the ETF should not be construed for the
future performance of the fund. It might not provide a basis of comparison with other
investments.
• The name of the Gold ETF doesn’t indicate the quality of the scheme or its future
prospects and the returns. Investors should study the terms of offer carefully and consult
their investment advisor before investing the scheme.
• ETFs are a new concept in India compared to other parts of the world.
• The sponsor of the mutual fund is not responsible or liable for any loss or shortfall
resulting from the operation of the fund beyond the initial contribution made by it of an
amount of Rs 1 Lac towards setting up of the Mutual Fund.
• Investors are not offered any guaranteed or assured returns.
• The scheme NAV will react to the Bullion Market movements. The investor could lose
money over short periods due to fluctuation in the schemes NAV in response to factors
such as economic and political developments, changes in interest rates and perceived
trends in Bullion market movements and over longer periods during market downturns.

Gold ETFs available in India

• Benchmark Mutual Fund - Gold Benchmark Exchange Traded Scheme (NSE Symbol:
GOLDBEES)
• Kotak Mutual Fund - Gold Exchange Traded Fund (NSE Symbol: KOTAKGOLD)
• UTI Mutual Fund - UTI Gold Exchange Traded Fund (NSE Symbol: GOLDSHARE)
• Reliance Mutual Fund - Gold Exchange Traded Fund (NSE Symbol: RELGOLD)
• Quantum Gold Fund - Exchange Traded Fund (ETF) (NSE Symbol: QGOLDHALF)

www.equitybulls.com - A report by AARUDHRA FINANCIAL SERVICES Page 4